OPINION ANALYSIS

Court approves early challenge to agency proceedings

To the surprise of few informed observers, Friday’s decision in Axon Enterprise v. Federal Trade Commission confirmed a new avenue for pre-enforcement challenges to the administrative proceedings of federal agencies. Traditionally, when an agency institutes an administrative proceeding, the defendant waits until the end of the proceeding and then challenges the result in a federal appeals court, which applies a deferential standard of review limited to the record that the agency has produced.

The Supreme Court broadened a different path with its decision in Axon, which was consolidated with a similar case involving the Securities and Exchange Commission. The two cases include a variety of challenges to the agency proceedings, but the common thread is a claim that the method of appointing the administrative judges unconstitutionally insulates them from presidential control.  Justice Elena Kagan’s opinion for the court allows the defendants in both cases to short-circuit the administrative process and go directly to a district court to challenge the proceedings up front.

Although the decision presages a considerable shift in the pattern of litigation resisting agency enforcement, it does not really come as a surprise, as it builds upon similar decisions the court has issued in recent years. Kagan, writing for all the justices except Justice Neil Gorsuch, treats the case as a straightforward application of a framework established in the court’s 1994 decision in Thunder Basin Coal Co. v. Reich. That case offers a three-factor test for deciding when a review scheme for agency action displaces the general jurisdiction that federal district courts exercise over federal questions: whether it would “foreclose … meaningful judicial review” to forgo district court adjudication; whether the claim is “wholly collateral” to the routine review procedure; and whether the claim is “outside the agency’s expertise.”

Kagan’s opinion notes that an earlier case, Free Enterprise Fund v. Public Company, had applied the Thunder Basin factors to support district-court adjudication in a similar case, which suggests “from 30,000 feet” that the “claims here … of the same ilk as the one in Free Enterprise Fund” should receive pre-enforcement district court adjudication as well. Still, she walks one by one through the three Thunder Basin factors and concludes that each supports district-court adjudication of these cases.

On the first point, she notes that the challenged harm here is “having to appear in proceedings” before an “unconstitutional agency authority.” For an injury of that sort, she notes, “it is impossible to [provide a] remedy once the proceeding is over, which is when appellate review kicks in.” The appellate court “could of course vacate the [agency]’s order,” but that is no remedy at all for a “claim … about subjection to an illegitimate proceeding, led by an illegitimate decisionmaker. … A proceeding that has already happened cannot be undone.”

The second factor, she explains, “favors Axon and Cochran for much the same reason – because they are challenging the Commissions’ power to proceed at all, rather than actions taken in the agency proceedings.” Because the claims “have nothing to do with the enforcement-related matters the Commissions regularly adjudicate, [they] are collateral (cleaned up)” in the sense that is relevant to the Thunder Basin inquiry.

On third and final factor, Kagan rests on the remoteness of the challenges from the agencies’ expertise: Axon and Cochran contend that “ALJs are too far insulated from the President’s supervision,” while Axon challenges the FTC’s “combination of prosecutorial and adjudicative functions.” Conceding that the FTC “knows a good deal about competition policy,” she suggests that it knows “nothing special about the separation of powers.”

With all three of the Thunder Basin factors pointing in the same direction, the rejection of the agencies’ position comes across as overdetermined. The only serious question after the argument was whether any of the justices would dissent: The answer is no, although two justices write separately. Justice Clarence Thomas joins Kagan’s opinion but would reject more broadly the constitutionality of the deferential review of agency decisions on appeal, while Gorsuch would reject Thunder Basin entirely and recognize an even broader right to district-court review of agency processes.

Because the decision follows so closely on Thunder Basin and Free Enterprise Fund, it is hardly earth-shaking. Still, the prominence of a Supreme Court decision directly validating an end run around agency proceedings of two of the largest federal commissions – the FTC and the SEC – is likely to spur an uptick in cases trying to forestall commission enforcement proceedings.